meet 6 (accounting for leases) revised

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Intermediate Accounting

14th Edition

21 Accounting for Leases

Kieso, Weygandt, and Warfield

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Ruang LingkupRuang Lingkup PSAK 30 PSAK 30 PSAK 30 (Revisi 2007) diterapkan dalam akuntansi untuk semua jenis PSAK 30 (Revisi 2007) diterapkan dalam akuntansi untuk semua jenis

sewa kecuali:sewa kecuali: Sewa dalam rangka eksplorasi atau penambangan mineral, minyak, gas Sewa dalam rangka eksplorasi atau penambangan mineral, minyak, gas

alam dan sumber daya lainnya yang tidak dapat diperbarui; dan alam dan sumber daya lainnya yang tidak dapat diperbarui; dan Perjanjian lisensi untuk hal-hal seperti film, rekaman video, karya Perjanjian lisensi untuk hal-hal seperti film, rekaman video, karya

panggung, manuskrip (karya tulis), hak paten dan hak ciptapanggung, manuskrip (karya tulis), hak paten dan hak cipta Pernyataan ini tidak diterapkan untuk pengukuran:Pernyataan ini tidak diterapkan untuk pengukuran:

Properti investasi yang diserahkan oleh lessor yang dicatat sebagai Properti investasi yang diserahkan oleh lessor yang dicatat sebagai sewa operasi (PSAK 13: Properti Investasi)sewa operasi (PSAK 13: Properti Investasi)

Properti investasi yang dikuasai oleh lessee yang dicatat sebagai sewa Properti investasi yang dikuasai oleh lessee yang dicatat sebagai sewa operasi (PSAK 13: Properti Investasi)operasi (PSAK 13: Properti Investasi)

Aset biologis yang dikuasai oleh lessee yang dicatat sebagai sewa Aset biologis yang dikuasai oleh lessee yang dicatat sebagai sewa pembiayaanpembiayaan

Aset biologis yang diserahkan oleh lessor yang dicatat sebagai sewa Aset biologis yang diserahkan oleh lessor yang dicatat sebagai sewa operasioperasi

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1. 100% financing at fixed rates. 2. Protection against obsolescence.3. Flexibility.4. Less costly financing.5. Tax advantages. (Ops)

6. Off-balance-sheet financing. (Ops)

The Leasing EnvironmentThe Leasing EnvironmentThe Leasing EnvironmentThe Leasing Environment

Advantages of Leasing

A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time.

Conceptual Nature of a Lease

Capitalize a lease that transfers substantially all of the benefits and risks of property ownership, provided the lease is non-cancelable.

Leases that do not transfer substantially all the benefits and risks of ownership are operating leases.

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Operating LeaseOperating Lease Capital LeaseCapital Lease

Rent expense xxx

Cash xxx

Leased equipment xxx

Lease liability xxx

Although technically legal title may not pass, the benefits from the use of the property do.

The Leasing EnvironmentThe Leasing EnvironmentThe Leasing EnvironmentThe Leasing Environment

Substance versus Form If the lessee capitalizes a lease, the lessee records an asset and a liability generally equal to the present value of the rental payments.

Records depreciation on the leased asset. Treats the lease payments as consisting of interest and principal.

Journal Entries for Capitalized Lease

Commencement of the lease term : Is the first date lessee can utilize leased asset, recognization

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For a capital lease, the FASB has identified four criteria.1. Lease transfers ownership of the property to the lessee.2. Lease contains a bargain-purchase option. At the inception of the

lease, the difference between the option price and the expected fair market value must be large enough to make exercise of the option reasonably assured.

3. Lease term is equal to 75 percent or more of the estimated economic life of the leased property.

Accounting by the LesseeAccounting by the LesseeAccounting by the LesseeAccounting by the Lessee

One or more must be met for finance lease

accounting.

4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property.

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Recovery of Investment Test (90% Test)

LO 2


Minimum Lease Payments:

Minimum rental payment

Guaranteed residual value

Penalty for failure to renew or extend the lease

Bargain-purchase option

Executory Costs:

Insurance

Maintenance

Taxes

Exclude from PV of Minimum Lease Payment Calculation

Capitalization Criteria

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Additional Additional IndiIndiccatorator of Capital Lease of Capital Lease ( (PSAK 30 PSAK 30 Par. 11)Par. 11)

If lease is cancelableIf lease is cancelable, lessor , lessor loss from lease loss from lease cancelation will bared by cancelation will bared by lesseelessee

Fair value fluctuation ofFair value fluctuation of residuresidualal value charges to value charges to lesseelessee

Lessee Lessee has capability to continue the rent for the has capability to continue the rent for the 2nd period with rental value that substantially lower 2nd period with rental value that substantially lower compare to rental market value. compare to rental market value.

Above criteria not always be conclusiveAbove criteria not always be conclusive..

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Recognition Recognition (( PSAK 30 PSAK 30 Par. 16)Par. 16) AsAssset et and lease liability recognized equal to and lease liability recognized equal to fair value of leased assets or fair value of leased assets or

present value of minimum paymentpresent value of minimum payment ,, if the present value lower from fair value if the present value lower from fair value.. Lessee compute PV Minimum payment using incremental except Lessee compute PV Minimum payment using incremental except impliimpliccit it lease lease

rate is known and less than incrementalrate is known and less than incremental Direct initial/closely related cost can be added as an Direct initial/closely related cost can be added as an additional to additional to asasssetet value value, ,

i.e: negotiation and ascertainment of the lease.i.e: negotiation and ascertainment of the lease. Separate interest expense and liability payment in minimum payment Separate interest expense and liability payment in minimum payment

recognition. recognition. The expense must be allocated along lease periodThe expense must be allocated along lease period. .

Depreciation and Impairment Depreciation and Impairment Depreciation Depreciation (Par. 23 – 24)(Par. 23 – 24)

(Financial lease) Must be consistently applied according to (Financial lease) Must be consistently applied according to PSAK 16 PSAK 16 (revision 2007) (revision 2007) and and PSAK 19PSAK 19..

If lease If lease transfers ownershiptransfers ownership, depreciate asset over the , depreciate asset over the economic lifeeconomic life of the asset. of the asset. If lease If lease does not transfer ownershipdoes not transfer ownership, depreciate over the , depreciate over the term of the leaseterm of the lease..

If there is some uncertainty of ownership transfer at the end of the lease If there is some uncertainty of ownership transfer at the end of the lease period, period, then, then, choose shorter periods between lease period and economic choose shorter periods between lease period and economic lifelife..

Impairment Impairment (Par. 26)(Par. 26) PSAK 48PSAK 48 applied applied

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Presentation and DisclosurePresentation and Disclosure As additional of As additional of PSAK 50 (Revisi 2006), PSAK 50 (Revisi 2006), below also must be disclosed by below also must be disclosed by Lessee Lessee

(Par. 27):(Par. 27): Recorded net value for each asset groupsRecorded net value for each asset groups Reconciliation between PV minimum payment on presentation date VS PV on Reconciliation between PV minimum payment on presentation date VS PV on

following datefollowing date:: Below 1 yearBelow 1 year 1 – 5 years1 – 5 years More than 5 yearsMore than 5 years

Lease contigent recoginized as current cost on the period. Lease contigent recoginized as current cost on the period. Estimation of non cancelable total minimum lease payment in the futureEstimation of non cancelable total minimum lease payment in the future Present in financial notes Present in financial notes ::

The fundamental contingency of lease liability, The fundamental contingency of lease liability, Extension or Purchase option, Extension or Purchase option, Limitation applied in lease agreement Limitation applied in lease agreement , , i.e devidendi.e devidend,, increase of liability increase of liability ,,

or lease extensionor lease extension..

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E21-1: On January 1, 2012, Adams Corporation signed a 5-year

noncancelable lease for a machine. The terms of the lease called for

Adams to make annual payments of $9,968 at the beginning of each year,

starting January 1, 2012. The machine has an estimated useful life of 6

years and a $5,000 unguaranteed residual value. Adams uses the

straight-line method of depreciation for all of its plant assets. Adams’s

incremental borrowing rate is 10%, and the lessor’s implicit rate is

unknown.

LO 2


Instructions

(a) What type of lease is this? Explain.

(b) Compute the present value of the minimum lease payments.

(c) Prepare all necessary journal entries for Adams for this lease through

January 1, 2013.

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E21-1: What type of lease is this? Explain.


Capitalization Criteria:

1. Transfer of ownership

2. Bargain purchase option

3. Lease term = 75% of economic life of leased property

4. Present value of minimum lease payments => 90% of FMV of property

NO

NO

Lease term

5 yrs.Economic life

6 yrs.

YES

83.3%

FMV of leased property is unknown.

This is CAPITAL LEASE.

This is CAPITAL LEASE.

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Payment $ 9,968

Present value factor (i=10%,n=5) 4.16986

PV of minimum lease payments $41,565

Leased Machine (under capital leases) 41,565Lease Liability

41,565Lease Liability 9,968

Cash9,968

1/1/12 Journal Entries:

E21-1: Compute present value of the minimum lease payments.

10%

Lease Interest Reduction Lease

Date Payment Expense in Liability Liability

1/1/12 41,565$

1/1/12 9,968$ 9,968$ 31,597

12/31/12 9,968 3,160 6,808 24,789

12/31/13 9,968 2,479 7,489 17,300

12/31/14 9,968 1,730 8,238 9,062

12/31/15 9,968 906 9,062 0

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Depreciation Expense 8,313Accumulated Depreciation 8,313($41,565 ÷ 5 = $8,313)

Interest Expense 3,160Interest Payable 3,160($41,565 – $9,968) X .10]

12/31/12

E21-1: Journal entries for Adams through Jan. 1, 2013.

E21-1: Journal entries for Adams through Jan. 1, 2012.

1/1/13

Lease Liability 6,808Interest Payable 3,160

Cash 9,968

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Operating MethodThe lessee assigns rent to the periods benefiting from the use of the asset and ignores, in the accounting, any commitments to make future payments.

Illustration: Assume Adams accounts for it as an operating lease. Adams records this payment on January 1, 2012, as follows.

Rent Expense 9,968Cash 9,968

E21-1 Finance Lease Operating

Depreciation Interest Lease

Date Expense Expense Total Expense Diff.

2012 8,313$ 3,160$ 11,473$ 9,968$ 1,505$

2013 8,313 2,479 10,792 9,968 824

2014 8,313 1,730 10,043 9,968 75

2015 8,313 906 9,219 9,968 (749)

2016 8,313 8,313 9,968 (1,655)

41,565$ 8,275$ 49,840$ 49,840$ 0

E21-1: Comparison of Capital Lease with Operating Lease

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1. Interest revenue. An alternative means of obtaining a profit opportunity in a transaction that enables the lessor company to transfer an asset by the lease agreement. This transfer also permits the lessor to earn a rate of return in the form of interest on the selling price of the leased asset.

2. Tax incentives.3. High residual value.

Accounting by the LessorAccounting by the LessorAccounting by the LessorAccounting by the Lessor

Benefits to the Lessor

Why Do Companies Lease?Why Do Companies Lease?Why Do Companies Lease?Why Do Companies Lease?

Companies choose operating leases because the leased asset and

the related obligation do not appear on the balance sheet, allowing

them to show a more favorable debt ratio and return on assets.

In general, companies with operating leases report less interest, higher income, and more favorable returns on equity than companies with capital leases.

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a. Operating leases.

b. Direct-financing leases.

c. Sales-type leases.

Classification of Leases by the Lessor


LO 4 Identify the classifications of leases for the lessor.

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E21-10 (Computation of Rental): Fieval Leasing Company signs an agreement on January 1, 2012, to lease equipment to Reid Company. The following information relates to this agreement.

1. The term of the non-cancelable lease is 6 years with no renewal option. The equipment has an estimated economic life of 6 years.

2. The cost and fair value of the asset at January 1, 2012, is $343,000.3. The asset will revert to the lessor at the end of the lease term, at which

time the asset is expected to have a residual value of $61,071, none of which is guaranteed.

4. The agreement requires equal annual rental payments, beginning on January 1, 2012.

5. Collectability of the lease payments is reasonably predictable. There are no important uncertainties surrounding the amount of costs yet to be incurred by the lessor.


A lessor determines the amount of the rental, based on the rate of return—the implicit rate—needed to justify leasing the asset.If a residual value is involved (whether guaranteed or not), the company would not have to recover as much from the lease payments

Economics of Leasing

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Comparison Lessor vs LesseeComparison Lessor vs LesseeComparison Lessor vs LesseeComparison Lessor vs Lessee

LO 4

Illustration 21-11Classification of Leases by the Lessor

A lessor may classify a lease as an operating lease but the lessee may classify the same lease as a capital lease.

Classification of Leases by the Lessee

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Residual value 61,071$

PV of single sum (i=10%, n=6) 0.56447

PV of residual value 34,473$

Fair market value of leased equipment 343,000$

Present value of residual value (34,473)

Amount to be recovered through lease payment 308,527

PV factor of annunity due (i=10%, n=6) 4.79079

Annual payment required 64,400$

E21-10 (Computation of Rental): Assuming the lessor desires a 10% rate of return on its investment, calculate the amount of the annual rental payment required.

÷

x

-

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A sales-type lease involves a manufacturer’s or dealer’s profit, and a direct-financing lease does not.

Classification of Leases by the Lessor Illustration 21-10

Direct-Financing Method (Lessor)

In substance the financing of an asset purchase by the lessee.Lessor records:

A lease receivable instead of a leased asset. Receivable is the present value of the minimum lease payments.

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LO 5

E21-10: Amortization schedule for the lessor.

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LO 5 Describe the lessor’s accounting for direct-financing leases.

1/1/12 Cash 64,400Lease Receivable 36,540Interest Receivable 27,860

12/31/12 Interest Receivable 24,206Interest Revenue 24,206

E21-10: Prepare all of the journal entries for the lessor for 2012 and 2013.

1/1/12 Lease Receivable 343,000Equipment 343,000

1/1/12 Cash 64,400Lease Receivable 64,400

12/31/12 Interest Receivable 27,860Interest Revenue 27,860

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Records each rental receipt as rental revenue.

Depreciates leased asset in the normal manner.


Operating Method (Lessor)

Illustration: Assume Fieval accounts for the lease as an operating lease. It records

the cash rental receipt as follows:

Cash 64,400

Rental Revenue 64,400

Depreciation is recorded as follows:

Depreciation Expense 46,989

Accumulated Depreciation 46,989

($343,000 – 61,067) / 6 years = 57,167

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1. Residual values.

2. Sales-type leases (lessor).

3. Bargain-purchase options.

4. Initial direct costs.

5. Current versus non-current classification.

6. Disclosure.

Special Accounting ProblemsSpecial Accounting ProblemsSpecial Accounting ProblemsSpecial Accounting Problems

LO 6 Identify special features of lease arrangements that cause unique accounting problems.

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Estimated fair value of the leased asset at the end of the lease term.

Guaranteed Residual Value – Lessee agrees to make up any

deficiency below a stated amount that the lessor realizes in residual value at

the end of the lease term.

The parties to a lease use guaranteed residual value in lease arrangements

for two reasons. The first is a business reason: It protects the lessor against

any loss in estimated residual value, thereby ensuring the lessor of the

desired rate of return on investment.

Unguaranteed Residual Value


1. Residual Value

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Illustration (Guaranteed Residual Value – Lessee Accounting): Caterpillar Financial Services Corp. (a subsidiary of Caterpillar) and Sterling Construction Corp. sign a lease agreement dated January 1, 2012, that calls for Caterpillar to lease a front-end loader to Sterling beginning January 1, 2012. The terms and provisions of the lease agreement, and other pertinent data, are as follows.

The term of the lease is five years. The lease agreement is noncancelable, requiring equal rental payments at the beginning of each year (annuity-due basis).

The loader has a fair value at the inception of the lease of $100,000, an estimated economic life of five years, and estimated residual value of $5,000 at the end of the lease.


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Illustration (Guaranteed Residual Value – Lessee Accounting): Sterling pays all of the executory costs directly to third parties

except for the property taxes of $2,000 per year, which is included as part of its annual payments to Caterpillar.

The lease contains no renewal options. The loader reverts to Caterpillar at the termination of the lease.

Sterling’s incremental borrowing rate is 11 percent per year. Sterling depreciates on a straight-line basis. Caterpillar sets the annual rental to earn a rate of return on its

investment of 10 percent per year; Sterling knows this fact.


Caterpillar computation of the lease payments:

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Illustration (Guaranteed Residual Value – Lessee Accounting):


Computation of Lessee’s capitalized amount Illustration 21-17

21-30

Illustration (Guaranteed Residual Value – Lessee Accounting):Illustration 21-19


At the end of the lease term, before the lessee transfers the asset to Caterpillar, the lease asset and liability accounts have the following balances.

Assume that Sterling depreciated the leased asset down to its residual value of $5,000 but that the fair market value of the residual value at December 31, 2016, was $3,000. Sterling would make the following journal entry.

Loss on Capital Lease 2,000.00Interest Expense (or Interest Payable) 454.76Lease Liability 4,545.24Accumulated Depreciation 95,000.00

Leased Equipment (under capital leases) 100,000.00

Cash 2,000.00

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Assume the same facts as those above except that the $5,000 residual value is unguaranteed instead of guaranteed. Caterpillar would compute the amount of the lease payments as follows:


Illustration (Unguaranteed Residual Value – Lessee Accounting):

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At the end of the lease term, before Sterling transfers the asset to

Caterpillar, the lease asset and liability accounts have the following

balances.Illustration 21-22


Illustration (Unguaranteed Residual Value – Lessee Accounting):

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Illustration 21-23Comparative Entries, Lessee Company

21-34


Illustration: Assume a direct-financing lease with a residual value (either guaranteed or unguaranteed) of $5,000. Caterpillar determines the payments as follows.

Lessor Accounting for Residual ValueThe lessor works on the assumption that it will realize the residual value at the end of the lease term whether guaranteed or unguaranteed.

Illustration 21-24

21-35


Illustration: Caterpillar would make the following entries for this direct-

financing lease in the first year.Illustration 21-26

Lessor Accounting for Residual Value

21-36

Primary difference between a direct-financing lease and a sales-type lease is the

manufacturer’s or dealer’s gross profit (or loss).

Lessor records the sale price of the asset, the cost of goods sold and related

inventory reduction, and the lease receivable.

Difference in accounting for guaranteed and unguaranteed residual values.

2. Sales-Type Leases (Lessor)


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Illustration: To illustrate a sales-type lease with a guaranteed residual value and

with an unguaranteed residual value, assume the same facts as in the preceding

direct-financing lease situation. The estimated residual value is $5,000 (the present

value of which is $3,104.60), and the leased equipment has an $85,000 cost to the

dealer, Caterpillar. Assume that the fair market value of the residual value is $3,000 at

the end of the lease term.


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Illustration: Caterpillar makes the following entries.

Illustration 21-29


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Present value of the minimum lease payments must include the present

value of the option.

Only difference between the accounting treatment for a bargain-purchase

option and a guaranteed residual value of identical amounts is in the

computation of the annual depreciation.

3. Bargain Purchase Option (Lessee)


Accounting for initial direct costs:

Operating leases, the lessor should defer initial direct costs.

Sales-type leases, the lessor expenses the initial direct costs.

Direct-financing lease, the lessor adds initial direct costs to the net

investment.

4. Initial Direct Costs (Lessor)

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GAAP does not indicate how to measure the current and noncurrent amounts.

For both the annuity-due and the ordinary-annuity situations report the reduction of

principal for the next period as a current liability/current asset.

5. Current versus Noncurrent


1. General description of the nature of leasing arrangements.

2. The nature, timing, and amount of cash inflows and outflows associated with leases,

including payments to be paid or received for each of the five succeeding years.

3. The amount of lease revenues and expenses reported in the income statement each

period.

4. Description and amounts of leased assets by major balance sheet classification and

related liabilities.

5. Amounts receivable and unearned revenues under lease agreements.

6. Disclosing Lease Data

21-41LO 10

Illustration 21A-1Illustrative LeaseSituations, Lessors

APPENDIXAPPENDIX 21A EXAMPLES OF LEASE ARRANGEMENTS

21-42 LO 10


21-43 LO 10


21-44

Illustration 21A-3

LO 10 Understand and apply lease accounting concepts to various lease arrangements.


21-45


LO 10

21-46

Illustration 21A-4



21-47LO 10 Understand and apply lease accounting

concepts to various lease arrangements.


21-48

Illustration 21A-5



21-49 LO 11 Describe the lessee’s accounting for sale-leaseback transactions.

The term sale-leaseback describes a transaction in which the

owner of the property (seller-lessee) sells the property to

another and simultaneously leases it back from the new owner.

Advantages:

1. Financing

2. Taxes

APPENDIXAPPENDIX 21B SALE-LEASEBACKS


Determining Asset Use

To the extent the seller-lessee continues to use the asset

after the sale, the sale-leaseback is really a form of financing.

Lessor should not recognize a gain or loss on the

transaction.

If the seller-lessee gives up the right to the use of the asset,

the transaction is in substance a sale.

Gain or loss recognition is appropriate.



If the lease meets one of the four criteria for treatment as a

capital lease, the seller-lessee should

Account for the transaction as a sale and the lease as a

capital lease.

Defer any profit or loss it experiences from the sale of the

assets that are leased back under a capital lease.

Amortize profit over the lease term .

Lessee



If none of the capital lease criteria are satisfied, the seller-

lessee accounts for the transaction as a sale and the lease as

an operating lease.

Lessee defers such profit or loss and amortizes it in

proportion to the rental payments over the period when it

expects to use the assets.

Lessee



If the lease meets one of the lease capitalization criteria, the

purchaser-lessor records the transaction as a purchase and a

direct-financing lease.

If the lease does not meet the criteria, the purchaser-lessor

records the transaction as a purchase and an operating lease.

Lessor



American Airlines on January 1, 2011, sells a used Boeing 757 having a carrying

amount on its books of $75,500,000 to CitiCapital for $80,000,000. American

immediately leases the aircraft back under the following conditions:

1. The term of the lease is 15 years, noncancelable, and requires equal rental

payments of $10,487,443 at the beginning of each year.

2. The aircraft has a fair value of $80,000,000 on January 1, 2012, and an

estimated economic life of 15 years.

3. American pays all executory costs.

4. American depreciates similar aircraft that it owns on a straight-line basis

over 15 years.

5. The annual payments assure the lessor a 12 percent return.

6. American’s incremental borrowing rate is 12 percent.

Sale-Leaseback Example



This lease is a finance lease to American because the lease

term is equal to the estimated life of the aircraft and because

the present value of the lease payments is equal to the fair

value of the aircraft to CitiCapital.

CitiCapital should classify this lease as a direct financing lease.

Sale-Leaseback Example


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Illustration 21B-1


meet 6 (accounting for leases) revised

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